Category: Adam Smith

250 Years of the modern world

Today is the quarter-millennium of the event which overturned centuries of folly and allowed the world to prosper; an event which would come to bring peace more than any other of the modern age: the publication of An Inquiry into the Nature and Causes of the Wealth of Nations.

I would say it is hard to imagine the mindset before this day in 1776, but the same bad instincts arise amongst every new set of politicians, but we now have Adam Smith’s work to set against them.  From the Renaissance to before The Wealth of Nations, Europe and much of the world followed by instinct the Old Mercantilist System. The stronger nations seized colonies to build a trading monopoly. No nation but Spain was allowed to trade with Spanish America – one of the causes of the War of Jenkins’ Ear was the withdrawal of the Asiento, allowing English merchants to trade slaves at certain ports in South America. Many Georgian-era wars were fought to capture plantation colonies. Part of the reason for the American rebellion was that the mercantilist system forbade the rest of the word  from trading with the American colonies, when the homeland Britons could trade anywhere. Had the Americans but waited a year or two for Adam Smith’s lessons to be learned, a major cause of discontent could have been lifted.

Our whole understanding of economics comes from The Wealth of Nations. It cannot be overstated. Even those who do not accept the economics of the free market have to start to frame their opposition from the axioms of Smith’s work.

In Britain, Smith’s work was swiftly accepted, and we began to prosper all the more. Tariffs and taxes were lifted (and tax revenue increased). The system of slavery in the colonies, which Smith hated for moral reasons, began to evaporate as the logic of labour was understood, until slavery could definitively be banned.

To Smith too can we attribute the relative peace of the world. It seems odd to say that the publication of The Wealth of Nations brought peace when it was immediately followed by the ruinous American War and then twenty-two years of continual war with France, but it was so, even if the effects were delayed. After the loss of the colonies, Britain and France found peace in trade, in a brief summer before their the Revolution. Even during the two bloody decades before Waterloo, Bonaparte noticed. His strategy against Britain was to cut our trade: that was why he invaded Portugal, and why he compelled Denmark into his war; and why Nelson destroyed Denmark’s fleet. When the war ended, Europe began to see the necessity of peace. The economy is a fine-tuned instrument, fed by trade, and cutting trade off will hurt everyone.  Not a single British bullet was fired in anger in Europe between 1815 and the Summer of 1914.

Over in the rebellious colonies, they have a chief who is turning his back on Adam Smith’s lessons, imposing tariffs despite those sage words that should tell us that tariffs mainly hurt those they are intended to benefit.  Perhaps someone should give him a special Semiquincentennial edition of An Inquiry into the Nature and Causes of the Wealth of Nations.

Rather than just celebrating 250 years of their independence, America would do well to celebrate 250 years of The Wealth of Nations, and learn from it.

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Productive and Unproductive Labour

My taxes support an army of wasters. It is unsustainable (in the proper sense of the term) just as Adam Smith taught us two and a half centuries ago. We need a refresher course.

An argument for ‘No representation without taxation’ will not get of the starting blocks, allowing only to those who make a net contribution to vote, but it is what I think when particularly frustrated as a (mostly) economically productive man in my way, gasping at the army of civil servants and hangers-on feeding off tax money while creating nothing themselves.

Adam Smith made the distinction between productive and unproductive labour and, crucially, identified that labour can be valuable and indeed necessary but still be unproductive of value. A society thrives economically only if productive labour dominates, but today the balance has shifted to unsustainable unproductivity.

Smith wrote:

“There is one sort of labour which adds to the value of the subject upon which it is bestowed; there is another which has no such effect. The former as it produces a value, may be called productive, the latter, unproductive labour.

Thus the labour of a manufacturer adds generally to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit. Though the manufacturer has his wages advanced to him by his master, he in reality costs him no expense, the value of those wages being generally restored, together with a profit, in the improved value of the subject upon which his labour is bestowed. But the maintenance of a menial servant never is restored.

A man grows rich by employing a multitude of manufacturers; he grows poor by maintaining a multitude or menial servants. The labour of the latter, however, has its value, and deserves its reward as well as that of the former. But the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up, to be employed, if necessary, upon some other occasion. That subject, or, what is the same thing, the price of that subject, can afterwards, if necessary, put into motion a quantity of labour equal to that which had originally produced it. The labour of the menial servant, on the contrary, does not fix or realize itself in any particular subject or vendible commodity. His services generally perish in the very instant of their performance, and seldom leave any trace of value behind them, for which an equal quantity of service could afterwards be procured.

The labour of some of the most respectable orders in the society is, like that of menial servants, unproductive of any value, and does not fix or realize itself in any permanent subject, or vendible commodity, which endures after that labour is past, and for which an equal quantity of labour could afterwards be procured.

The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers. They are the servants of the public, and are maintained by a part of the annual produce of the industry of other people. Their service, how honourable, how useful, or how necessary soever, produces nothing for which an equal quantity of service can afterwards be procured. The protection, security, and defence, of the commonwealth, the effect of their labour this year, will not purchase its protection, security, and defence, for the year to come.

In the same class must be ranked, some both of the gravest and most important, and some of the most frivolous professions; churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc. The labour of the meanest of these has a certain value, regulated by the very same principles which regulate that of every other sort of labour; and that of the noblest and most useful, produces nothing which could afterwards purchase or procure an equal quantity of labour. Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production.

Both productive and unproductive labourers, and those who do not labour at all, are all equally maintained by the annual produce of the land and labour of the country. This produce, how great soever, can never be infinite, but must have certain limits.

Though the whole annual produce of the land and labour of every country is no doubt ultimately destined for supplying the consumption of its inhabitants, and for procuring a revenue to them; yet when it first comes either from the ground, or from the hands of the productive labourers.”

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Sign the Australia deal

There is a free trade deal with Australia to be had: sign it. No text is available, but the Australian government has published its terms, and they are exactly what the British side would be looking for too. It’s a bonzer deal, mate.

One thing I was told repeatedly when canvassing for Leave in the referendum: when we are out of the EU, we must apologise deeply to the Australians. What was done in 1972 was unforgivable, freezing them out of their main export market as we turned to Europe. Now it is overdue the time to return to normality, which is free trade between Britain and the Old Commonwealth. Australia and New Zealand were settled, established and made equal, independent realms on the basis that we were all one and equal and trading between ourselves: betraying those basic understandings unilaterally, insulting the tie of kinship, for a flawed engagement with Europe, was a scandal that hurt badly in Australia and New Zealand and has never stopped hurting.

Cynical commentators (though we do need cynics), portray Australia as a minor player, an exporter of mutton, wool and beef, but that is a generation out of date. There are indeed more sheep in Australia than people in the British Isles, and it is important sector, but the main game in town these days is mining: Australia is the world’s largest producer of iron and bauxite, and around the top of copper, coal and much else besides.. Cheap iron, steel, copper and aluminium are vital for industry. that is only in one sector: Australia is a wonderland for industry and agriculture.

It is in agriculture that the objections have been raised. Farmers’ representatives are screaming about being unable to compete with the vast economies of scale that Australia has in sheep and cattle. One could combat the worry by pointing to the distances involved that even in our crowded islands we have more than half the number of sheep that whole continent has, and our flocks are closer. However mathematics aside, we must never forget Adam Smith. It is almost two and a half centuries since The Wealth of Nations, and it is still hard to convince people of the truth and logic of its observations. Customs duties are imposed at the demand of local producers who fear competition, and in Smith’s day too these were mainly farmers. However every example he analysed over centuries showed that customs duties do significant harm to those who demanded them. By Adam Smith’s principles, farmers should be welcoming free trade. Even apart from competition on wool, all the equipment around the farm, from heavy machinery down to stock fences, needs steel and aluminium: without free trade these are more expensive. All that ore and bauxite coming out of the ground will, if duties are lifted, reduce the cost of farming and boost profit.

We could look at it another, more philosophical way too:

Imagine Britain is running out of land (as we are) and there appears out of the sea a new, practically empty country ideal for flocks and herds. The land is annexed and farmers are encouraged to cross to this new part of Britain and establish vast farms which our islands’ limited bounds could not fit until the new land appeared. We cheer the pioneers and encourage others to join them, not just farming but providing all the support, infrastructure industry and exchange needed so that the pastoral enterprise can thrive to its best. Then we may find that our mines are exhausted, but his miraculous new land has untapped resources, so we send miners there too. Would farmers in the old islands complain? Well maybe, but only with as much conviction as a hill farmer in Cumberland might grumble that those on the Cotswolds have it too easy: the new land was established to thrive and it has done. Now do we disown it and impose high taxes on those we encouraged to move to the new land? That would be shocking. This really though is the story of the settlement and growth of Australia.

Tony Abbott has observed that while Britain and Australia are juridically separate, we are not foreign to each other. That is at the nub of it. We are one nation, juridically separated, but of the same essential understandings and aiming for the same things. Our twin government can do deals for mutual benefit without trying to put one over on the other – a very different dynamic indeed from the negotiations with the European Union last year.

There is a deal to be done, and both governments have the same aims and criteria. Sign it.

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Famine speculators – the Adam Smith view

In a time of plague or scarcity, there is little love for the speculator who raises prices, and often a call for the government to intervene. Adam Smith however had this in view and observed that government intervention does more harm than good:

The interest of the inland dealer, and that of the great body of the people, how opposite soever they may at first appear, are, even in years of the greatest scarcity, exactly the same. It is his interest to raise the price of his corn as high as the real scarcity of the season requires, and it can never be his interest to raise it higher.

By raising the price, he discourages the consumption, and puts every body more or less, but particularly the inferior ranks of people, upon thrift and good management. If, by raising it too high, he discourages the consumption so much that the supply of the season is likely to go beyond the consumption of the season, and to last for some time after the next crop begins to come in, he runs the hazard, not only of losing a considerable part of his corn by natural causes, but of being obliged to sell what remains of it for much less than what he might have had for it several months before. If, by not raising the price high enough, he discourages the consumption so little, that the supply of the season is likely to fall short of the consumption of the season, he not only loses a part of the profit which he might otherwise have made, but he exposes the people to suffer before the end of the season, instead of the hardships of a dearth, the dreadful horrors of a famine.

It is the interest of the people that their daily, weekly, and monthly consumption should be proportioned as exactly as possible to the supply of the season. The interest of the inland corn dealer is the same. By supplying them, as nearly as he can judge, in this proportion, he is likely to sell all his corn for the highest price, and with the greatest profit; and his knowledge of the state of the crop, and of his daily, weekly, and monthly sales, enables him to judge, with more or less accuracy, how far they really are supplied in this manner.

Without intending the interest of the people, he is necessarily led, by a regard to his own interest, to treat them, even in years of scarcity, pretty much in the same manner as the prudent master of a vessel is sometimes obliged to treat his crew. When he foresees that provisions are likely to run short, he puts them upon short allowance. Though from excess of caution he should sometimes do this without any real necessity, yet all the inconveniencies which his crew can thereby suffer are inconsiderable, in comparison of the danger, misery, and ruin, to which they might sometimes be exposed by a less provident conduct.

Though, from excess of avarice, in the same manner, the inland corn merchant should sometimes raise the price of his corn somewhat higher than the scarcity of the season requires, yet all the inconveniencies which the people can suffer from this conduct, which effectually secures them from a famine in the end of the season, are inconsiderable, in comparison of what they might have been exposed to by a more liberal way of dealing in the beginning of it the corn merchant himself is likely to suffer the most by this excess of avarice; not only from the indignation which it generally excites against him, but, though he should escape the effects of this indignation, from the quantity of corn which it necessarily leaves upon his hands in the end of the season, and which, if the next season happens to prove favourable, he must always sell for a much lower price than he might otherwise have had.

Whoever examines, with attention, the history of the dearths and famines which have afflicted any part of Europe during either the course of the present or that of the two preceding centuries, of several of which we have pretty exact accounts, will find, I believe, that a dearth never has arisen from any combination among the inland dealers in corn, nor from any other cause but a real scarcity, occasioned sometimes, perhaps, and in some particular places, by the waste of war, but in by far the greatest number of cases by the fault of the seasons; and that a famine has never arisen from any other cause but the violence of government attempting, by improper means, to remedy the inconveniencies of a dearth.

Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations

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The Case of China

Adam Smith observed in The Wealth of Nations (1776):

China has been long one of the richest—i.e. one of the most fertile, best cultivated, most industrious, and most populous—countries in the world. But it seems to have been long stationary. Marco Polo, who visited it more than 500 years ago, describes its cultivation, industry, and populousness in almost the same terms in which they are described by travellers today. It had, perhaps even long before his time, acquired the full complement of riches which the nature of its laws and institutions permits it to acquire.

The accounts of all travellers, though inconsistent in many other respects, agree on the low wages of labour and on how hard it is for a labourer to bring up a family in China.

If by digging the ground for a whole day he can get what will purchase a small quantity of rice in the evening, he is contented. The condition of skilled workmen is perhaps even worse. Instead of waiting patiently in their workshops for the calls of their customers, as in Europe, they are continually running about the streets with the tools of their respective trades, offering their services—begging for employment.

The poverty of the lower ranks of people in China is far worse than that of the most beggarly nations in Europe. It is commonly said that in the neighbourhood of Canton many hundreds or even thousands of families have no home on the land, but live permanently in little fishing-boats on the rivers and canals. The subsistence they find there is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any European ship.

Marriage is encouraged in China not by the profitableness of children but by the liberty of destroying them. Every night in all large towns several babies are exposed in the street or drowned like puppies in the water. The performance of this nasty task is even said to be the avowed business by which some people earn their subsistence.

However, although China may be standing still it does not seem to go backwards. Its towns are nowhere deserted by their inhabitants. The lands which have been cultivated are nowhere neglected. So just about the same annual labour must continue to be performed, and the funds for maintaining it must not be noticeably diminished. So the lowest class of labourers, despite their scanty subsistence, must somehow find ways to continue their race far enough to keep up their usual numbers.

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